A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

October 11, 2010

Entrepreneurship and Innovation in Large Companies

In March of 2009, The Economist published a special report on entrepreneurship. Its lead article said: “For most people the term “entrepreneur” simply means anybody who starts a business, be it a corner shop or a high-tech start up . . . A disproportionate number of entrepreneurial companies are, indeed, small start-ups. The best way to break into a business is to offer new products or processes.”

But the article then went on to define entrepreneurship as something that applies not only to new or small companies. It defined the term as: “somebody who offers an innovative solution to a (frequently unrecognised) problem. The defining characteristic of entrepreneurship, then, is not the size of the company but the act of innovation.”

Given my forty year association with IBM, as well as my more recent involvement with Citigroup, it is not surprising that I am particularly interested in entrepreneurship and innovation in large companies. I have little experience with startup companies, but I have lots of experience with large, global companies, not just IBM and Citigroup, but many others I interacted with as part of my work, or that I closely followed because they were competitors.

Quite a few people think that entrepreneurship in large companies is an oxymoron. The Economist special report does not agree, but observes: “Many entrepreneurs are sworn enemies of large corporations, and many policymakers measure entrepreneurship by the number of small-business start-ups. This makes some sense. Start-ups are often more innovative than established companies because their incentives are sharper: they need to break into the market, and owner-entrepreneurs can do much better than even the most innovative company man.”

I have seen first hand how difficult entrepreneurship and innovation is for large enterprises. But I also have etched in my mind what usually happens to a company if it is not able to cope with the forces of innovation, having lived through IBM’s near-death experience in the early 1990s. In my long career, I have also seen countless companies in the IT industry go out of business, or become shadows of their former selves, because of their inability to adapt to disruptive technology and market changes.

I have thought a lot about what it takes for large companies to successfully embrace disruptive innovations, especially in the last few years as I have been teaching courses and giving seminars on the subject. The key, in my experience, is for the company to leverage its organizational, digital and physical assets, and successfully integrate the disruptive innovations with these core assets. If it can do so, the now rejuvenated and transformed assets will provide the company an advantage over both established competitors and startups. If it cannot, that is, if the disruptive innovation does not fit well with the company’s existing organization and assets, - the future looks rather bleak.

In my seminars and classes, we discuss these issues by examining four basic questions: What are the organization’s capabilities or core competencies needed to deal with this emerging technology?; how well does the new technology fit with existing legacy products, services and installed base?; how well does the new technology and related products and services fit with the overall organization?; and does the company have brand permission to go into this space naturally, or will it take a major marketing campaign to try to reposition the brand?

Let me give a couple of examples based on initiatives I was closely involved with at IBM, starting with supercomputing.

Supercomputers have generally been the fastest computers in the market. The first generation machines, from the 1960s, 1970s and 1980s, were built using highly sophisticated technologies and liquid cooling methods to remove the large amounts of heat they generated, as well as specialized vector architectures and other unique capabilities.

By the late 1980s, these highly complex and expensive technologies were no longer competitive. As the microprocessors used in personal computers and technical workstations were becoming increasingly powerful, you could now build supercomputers using these CMOS micros and parallel architectures at a much lower price than the previous generations of vector machines. A similar transition to microprocessor components and parallel architectures took place in the mainframes used in commercial applications.

IBM did not have much of a presence in supercomputing in the first generation of supercomputers. We decided to enter the market as it was changing in the early 1990s, and formed a new unit to build parallel supercomputers. There were already a number of parallel supercomputers startups in the market, such as Thinking Machines, nCUBE and MasPar, each based on the unique parallel architecture its founders had invented.

The first task of our new parallel supercomputer unit was to decide on the overall product design, including choice of microprocessor, software and parallel architecture. We looked at a number of ideas from research labs and competitors. Most of them involved one-of-a-kind parallel architecture designs. We had no special advantage with these designs, which we felt would make it very difficult for a large company like IBM to successfully compete head-to-head against highly focused, expert startups in a brand new market.

At the time, IBM had established a successful family of technical workstations and servers, the RS6000, which used the RISC-based POWER microprocessor and the Unix-based AIX operating system. We made the decision to build IBM’s supercomputer products using most of the hardware and software components from the RS6000, and focused our R&D efforts on the key extensions needed to build a parallel supercomputer out of these components. The result was the Scalable POWERparallel (SP) family. A few years later, the SP was integrated into the overall RS6000 family.

Because we leveraged the existing components and investments from the RS6000 product line, we were able to build the new product in record time and budget. An alpha prototype was delivered to Argonne National Lab, - our first customer and launch partner, - about a year after development started. Moreover, the new parallel supercomputers were totally compatible with the RS6000 and therefore inherited all the applications that ran on those products. We thus had a very good application base to build on and adapt to the SP parallel architecture.

IBM is now the leader in high performance supercomputing, as measured by the number of systems placed in the world’s Top 500 list, - a position the company achieved by 2000. There is little question in my mind that the key reason IBM was able to develop a successful parallel supercomputing business, let alone become a market leader in such a short number of years, is because we made the decision to build the new SP family leveraging the RS6000 technologies and market presence.

The second example I want to discuss is the development of IBM’s e-business strategy in the mid-late 1990s. During the dot-com bubble, a lot of people were saying that in the Internet-based new economy, new Web startups had an inherent advantage over existing companies, whose legacy assets, including IT infrastructure and customer base, were no longer relevant, would slow them down and make it hard for them to compete.

After carefully analyzing what was going on in the marketplace and working closely with many customers around the world, we formulated our Internet strategy. Every business, we were convinced, would benefit from embracing the universal reach and connectivity of the Internet, not just startups. We believed that the brand reputation, installed customer base and IT infrastructures that companies had built over the years would be even more valuable assets when combined with the new capabilities offered by the Internet.

There was no question that new, innovative business models were being created around the Internet. But we also strongly believed that with the universal reach and connectivity of the Internet, all companies - large and small, new and mature - would be able to do what they did much, much better. Our position was not very popular during the height of the dot-com bubble, but once the bubble burst a few years later, it was clear that we had developed the right strategy and had given our customer the right advice.

With both these initiatives it was critical to frame our strategy in such a way that we could embrace the disruptive innovation as well as leverage our core competencies and legacy assets. It was important to develop new products and services around the emerging technologies, so we could go after new markets and customers. But, it was also very important to make it easier for our existing customers to take advantage of the new innovations. By bringing together our existing assets with the emerging disruptive innovations, we provided a natural path to evolve our installed base into the future.

In the end, entrepreneurship and innovation is the only way for an established company to compete effectively against hungry startups chasing it in the marketplace with creative new offerings. There is no alternative - the very survival of the company is at stake.

Comments

You talk lot about IBM and technology; what are your thoughts as it relates to consumer packaged goods where its existing techologies are the equivalent of large/expensive manufacturing plants that do not have the flexibility of the technology you have been referencing.

really interesting points. I'm a business writer and the rationale is the same in writing for keeping it clear, simple & concise. If you confuse your reader or presentation audience with too many words, concepts or angles, you create the same effect as the amateur photographer using an over-stuffed composition - confusion and ultimate loss of interest. so now link my name to see my website.

I believe that entrepreneurship is agnostic of the size of the organization. I would like to hear your thoughts around innovation coming from developing countries. It seems that innovation is mostly generated in developed countries and developing countries play "adapt and catch up". Do you see any signs of changes around this?

The days when innovation came mostly from developing countries are over. There are an increasing number of entrepreneurs and innovators in emerging economies all over the world, and we can expect that more and more great new ideas and products will come from them.

For example, the "Four Asian Tigers"- Singapore, Hong Kong, Taiwan and Korea, - transformed themselves over the past few decades from emerging to industrialized economies, developing all kinds of innovative products and services. I expect a similar path toward innovation with quite a number of today's emerging economies.